On The Brink with Castle Island - John Beccia (FS Vector) (EP.08)

Episode Date: October 14, 2019

John Beccia, the co-founder and CEO of FS Vector, a regulatory compliance, public policy, and business strategy advisory firm helping fintech, regtech, financial institutions and cryptoasset startups, joins the show.  Prior to FS Vector, John was the General Counsel and Head of Regulatory Compliance at Circle.  Learn more about FS Vector at https://www.fsvector.com/ For more information please visit our website at www.castleisland.vc and follow us on Twitter @CastleIslandVC.

Hi, everyone. Thanks for tuning in to another episode of On the Brink with Castle Island. Really excited about this episode. So Nick and I both actually interviewed our guest, John Betcha on this episode. John is the co-founder and the CEO of FS Vector. So FS Vector, for those of you who are not familiar, is a DC-based advisory firm. And so they're a resource for business, regulatory, compliance, technology, and public policy advice. They work with a ton of startups in the blockchain and crypto asset space and also the broader fintech space. And we wanted to have John on because he has a great perspective on where this industry has been and where it's going. So I actually first got to know John back in 2014 when they're starting Circle. And he came over to Fidelity with Jeremy and the rest of the founding team at Circle where John was the first general counsel and head of regulatory affairs. And so back then, this was kind of a wild west time. And the guys at Circle led by Jeremy and Sean Neville and John were really kind of the grownups in a lot of rooms and they're going around and telling people what Bitcoin is and what Circle was doing in the space. And I think importantly, they're going around

to a lot of regulators and a lot of big financial institutions and just explaining that Bitcoin could interact with them and Bitcoin could be a part of things that they eventually ended up building, which, you know, as we all know, ended up being things like custody firms and exchanges and trading technologies and data companies and companies that are building on top of some of these blockchains. And so John was really at the bleeding edge of a lot of those regulatory conversations. And so we get into some of that and we talk about what it was like to be in some of those rooms, having those discussions when a lot of people thought that Bitcoin was just, you know, drug money and Silk Road and Mount Gawks and all the kind of bad things that it was associated with in the early days.

We also talk about the ICO craze and where the SEC is with some of these enforcement actions. Talk a little bit about Bitcoin ETF. This was before the Bitwise proposal was rejected. but we talk about some of the structural things that need to change in that market in order for us to see a crypto asset ETF. And then we also just talk about some of the things that he's most excited about in the industry and in what he's seeing. So I think it's a great episode.

Hope that you enjoy it. And without further ado, here's our interview with John Betcha. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market. And the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing.

You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Welcome to the On the Brink podcast. I'm Matt Walsh. And I'm Nick Carter. We're fortunate to have John Betjet today. John is the co-founder and CEO of FS Vector. Thanks for joining us, John.

Hey, thanks for having me. Appreciate it. And so we're going to do a three-way pod, Nick. This is our first attempt at doing the three-way. We'll see how this works. So, John, prior to founding FS Fector, you were the general counsel and chief compliance officer at Circle. And Circle was super early in this industry.

You guys got to start in 2014, I believe. Like 2013, yeah. So what was that like? I mean, talk about the early days. What drew you to join Circle? How does someone with your background decide to jump into it? to the digital currency arena. Yeah, yeah.

And you've got to kind of imagine where it was coming from, too. So I spent most of my career in traditional financial services and banking, bankholding companies and more mainstream financial services institutions wearing a variety of hats. So I've always been my lawyer by trade. So I've always been in-house and doing legal work. I've always also had the compliance role and been head of compliance for a number of institutions and then spent some time in Washington, D.C., previously doing government

relations work. And all that was good preparation for what I had to face at Circle. But like everything else, everything in life is timing and just happened to get a call out of the blue through mutual acquaintance, a lawyer that I knew locally with Goodman Proctor and said that this person, Jeremy, was starting a company and needed some help around financial services regulation. And then I had no idea what to expect. And then after meeting with Jeremy and learning more, it was a big learning curve in terms of understanding what was going on at the time. I knew nothing about Bitcoin, nothing about the blockchain. And I think very few people did. Really kudos to Jeremy and Sean Neville, who is the other co-founder, for having some foresight and really seeing how the technology could be harnessed and what it meant to be able to utilize Bitcoin and cryptocurrency.

And those terms have really changed dramatically over the years. But really, I was brought in because one, they knew that this was something that would be regulated and would be in the terms of what Circle was trying to build. There was a number of different regulations that apply and we can get into that. But the thing that struck me at the outset was being one of the first hires for a firm that as a lawyer, you don't see that much, especially in the tech space, especially in the startup space. Looking at the team, the vision, the investors that they had, all those things really drew me into it and saying, hey, this is something that I want to get involved in. Well, it's crazy to think back about what the industry looked like in 2013. I mean, this was before Ethereum. This was before the private blockchain hype cycle, before ICOs were in the lexicon.

So what was your learning curve like? You mentioned that you hadn't even really dug into Bitcoin. So how did you even come up the learning curve in terms of what the protocol was and how it would be used? Yeah, exactly. I mean, I think at that time, we were talking really about Bitcoin. We were talking about, this was 2013. It was early days. Of course, the white paper goes back to 2008.

But the original white paper, the discussion was around a peer-to-peer payment system. That's what some of the things that we were looking to harness. We were really thinking about the payments use case and all the use cases around cryptocurrency. And at the time, there was a lot of players early days trying to figure out how to best make this into a use case that is good for consumers, that is good for investors in greater financial economy. And people were looking at mining, looking at merchant payment processing, payments, cross-border payments, remittances and things like that. And this was all interesting in terms of figuring out, I think we're all learning, not only myself, but just as a broader

ecosystem, the good news is there was a lot of interest, a lot of investors. To me, it was just really digging in and learning as you go. And being a lawyer, I'm not the most tech savvy person. Surprise, surprise. And so it was really spending time with those people who really understood the technology within Circle and outside of Circle and really needing to get up to speed because my job was to really be the interpreter to folks like myself on the financial services side, the regulators, law enforcement officials who also didn't know much about this and educate them as well.

And so Circle is interesting because if you look at the history of the company, it starts with a payments type of angle initially, which I think is how a lot of us got into this space. I think the concept of Bitcoin as digital gold was not something that was fully appreciated by the industry in 2013, certainly. I know when I first started looking at this, I did start to look at the whole industry through a payments angle initially before I really dug in. So I guess first, would you agree with that characterization? And then second, out of that, what type of regulatory strategy fell into place with that initial approach? Yeah. So let's step back and talk about the life cycle and where this has come. It's gone a long way, as you mentioned.

We're talking about Ethereum and smart contracts and tokens and what that can do. But early stages, we were just talking most about the payments use case. At Circle, we were talking about a social payments use case and the ability to send information the way you can send any other kind of content over the internet in a free way. In the case of payments, we know, is not effective. The Fed is looking at real-time payments and everybody's trying to make it better. but is there a way to make payments more secure faster, more seamless? And I think Bitcoin was able to do that. I don't think we fully harness where it can go.

But in which circle, we were trying to do it within this kind of social payments use case and make it a fun experience for people. And so over time, that has evolved, of course. And like you said, we did go through this period of people didn't want to pay for a cup of coffee with Bitcoin, but they did want to speculate. They did want to invest. They wanted one to see where this could go. And we went through this kind of crazy hype and hysteria where the price of Bitcoin went up to $20,000.

And people were trying to figure out we have all these altcoins. And now we are up to like 2,500, more than 2,500 cryptocurrencies. And I think that's obviously still interesting. But to me, we still haven't got to the point where there's a real consumer use case. And I think to me, I've always been a healthy skeptic on this. And around the blockchain technology, I think, is where the real benefits are. And I think right now what we're seeing, most of the benefits are not consumer facing. The distributed ledger, it's a record-keeping technology that can really have real impact

on things like clearance and settlement around interbank payments. You look at things like Ripple. You look at what they're doing. You look at some of the use cases with the big banks and J.P. Morgan and others. And I think all those things not only in financial services, but beyond financial services. So things we talk about around supply chain management, around record-keeping and the health care industry or real estate or others. I think all those are really compelling uses of the blockchain. Now, getting back to your original question was how do we deal with this from a regulatory

perspective? And in the payment side, whether it was payments or whether it was the trading, spot market, spot trading or other things like that, there was a lot of uncertainty and where you fit within where the regulations were at that time back in 2013. And there really wasn't much guidance. It really wasn't until FinCEN in 2013 came out with some guidance on the AML front in terms of saying at least if you're doing exchange and you're managing the on and off ramps of fiat to crypto, then there's a real risk there from a money laundering perspective. And so you need to have a program in place. You need to register with Vincent and the Treasury Department. You need to have KYC transaction monitoring, regulatory reporting and suspicious activities and

whatnot. So that was one thing. And that was kind of clear. But there were all kinds of other buckets of risk here. So there's buckets of the AML that's just one piece of it. There's consumer protection risk. Did the consumer understand the risks of what they were dealing with, the volatility of Bitcoin, the way this is traded, the fees associated with it? And there's also the security piece, obviously, was one of the impetus behind a lot of these things like the Bit License. So Mount Gox was a real kind of pivotal moment in time, having an exchange, one of the first big exchanges being hacked, and people losing money. As a custodian, you're holding people's assets. So that's something that the industry

needed to respond to. And so we were developing on one end from a practical perspective, we were mitigating the risk by developing compliance programs and developing fraud and risk management protocols, getting third-party insurance to protect against these types of things and creating a market there. From a licensing standpoint, really, we started out with the state licensing process. So we were a money transmitter. We had to get licensed in all 50 states, which is a real at the time. That must have been a really crazy process. Now it's a little bit more well understood. Yes, it's more well understood. I think we've driven, we've helped some of the government relations efforts and policy efforts have pushed the states to make that a more streamlined

process. And kudos to like the Conference of State Bank supervisors and they have a Vision 2020 program going on where they are coordinating on the front end in terms of streamlined licensing process and all these fingerprints that your directors need to get and all these applications and individual things you need to do as well as on the supervisory perspective. So we had to have like 50 different states coming in and examining us. You can imagine the amount of time and resources that you need to dedicate it to that to just be able to run a business. Trying to run a business.

And on the back end, your compliance function is overwhelmed by the level of audits and supervisory examination. So that was really the first piece of that state money transmission. And then we can talk more because over time, as the business evolved, as the technology evolved, then these other regulators came into play being the SEC, being the CFTC and the like in terms of, really, these were capital markets and they needed to be managed and regulated as a fair market appropriately. And so I want to dig into all of that, really, but maybe just to close the loop on Circle.

And so where we first met was actually at Fidelity, where your whole team, I think it was just five of you at the time, came in and gave a presentation. And it was sort of an interesting dynamic because we had spoken with a lot of entrepreneurs who might not have been as polished as the five of you at the time. And I think a lot of people had their attention peak that it was very serious people that were starting business. And you must have been doing a ton of education. Are there any anecdotes or experiences that you particularly remember going around and evangelizing Bitcoin and talking about what you guys were building at that time? Yeah, we were definitely some of the older people in there. We were like the old guys in the room with some of this stuff.

And a little bit gray hair did give some credibility and credence to what we were doing. But also, yeah, we took it very seriously. And education was one of the biggest things we did. And forward thinking on the regulatory piece and the compliance piece, I say this over and over again, it was a real competitive advantage for what we were building. We were able to get the bit license. We were the first to get the bit license in New York, for example. We were able to get Goldman Sachs to invest in us.

We were able to get bank partners early days when really people were struggling. and banks didn't want to take on the risks of partnering with these types of business. The reason we were able to do that was one because we were building things, but also because of the education that you mentioned. So we spent a lot of time with regulators, even regulators that we weren't under their supervisory purview. So like the OCC and others, we brought them into our office. We had conversations.

We went down to D.C. We traveled globally to talk to folks in specific areas as well, like on the money laundering front. We spent a lot of time with law enforcement, secret service. and Homeland Security and FBI and others. I served on some government working groups like the Bank Secrecy Act Advisory Group, which is part of the U.S. Treasury Department, and that's an industry government collaboration. I did the same in Europe with Europol.

And really, it was kind of the benefits of that were two-way. It was a two-way street, really trying to understand what the regulatory expectations were, what the law enforcement expectations were, what they were seeing, because we were just seeing a small piece of the ecosystem through our customer base, understanding the trends in the marketplace and then also trying to relate in terms of how we saw this. And we understood that there's risks in here, but these risks can be mitigated, just like in any other business. When I was at a bank, we had to mitigate certain risks. And I would say in some case, we had a good story to tell because what we were building,

the way we were leveraging technology in the early stages of reg tech, and because of the transparency of the blockchain, we're actually able to provide better information to law enforcement for cases. So we were able to really understand and get a digital fingerprint of our customer and understand as we onboarded them and be able to harness, use things like blockchain forensic tools, like a chain analysis or elliptic. You combine that information and we were able to provide those data points, which were very much of interest to regulators in terms of, yes, you're able to do compliance in a different way and to be able to and also look behind transactions. So we could see the IP address and the Bitcoin addresses and things like that. And all that stuff was very, very beneficial in terms of understanding from the government's perspective as well. So you left Circle a little bit over a year ago to start FS Vector.

Tell us a little bit about why you did that, why you struck out on the entrepreneurial path. And then we'd love to get into some of the larger regulatory issues that you're seeing, maybe some of the pain points for entrepreneurs that made you feel like there was an opportunity to start a business here. Once you do a first startup, then you get kind of addicted to building things. And so was it just an unbelievable experience with Circle? Just the team and the level of talent is like nothing I've ever seen having been in the banking space and the ability of folks there to just build things. And of course, Jeremy and Sean were just the strategy and the forward thinking.

And it was just amazing to me to see the things that they were talking about in 2013 to come into play into fruition as you look to three years down the line. And so we were able to build a successful franchise and obviously I was very happy with the way the company was going. And it just seemed the time was right. Being in the startup world, the years are measured a little differently. So like four and a half years is a really long time. It was a time I thought to start something. And really FSVector is an extension of what I was doing at Circle is really trying to think through all these different issues around how do you get to market? How do you build an innovative company, especially in uncertain regulatory space? I started the firm with Raj Date.

Raj Dadeh is a investor. He's a former regulator, was the deputy director and really built and started this. CFPB, the Consumer Financial Protection Bureau in D.C. And he's on the board of Circle. We spent a lot of time at Circle and we decided to start this firm and build something that could help innovative companies, financial services companies, of course, blockchain and Bitcoin, cryptocurrency companies, but it's also payments, lending, credit, all these folks that are trying to provide things to the consumers in a different way. If you look at millennials today and the way that millennials spend or save or do anything like this. It's a lot different than the way someone like me does it. They don't have a wallet. Everything's done through the phone. There's a lot of interesting use

cases there and a lot of interesting business models that we're working with on a day-to-day basis. What we're doing for our clients is really three things. One is a kind of a straight business advisory trying to figure out how to get to market. What type of investors can we connect you with? What types of partnerships? How do you think about governance? What is a regulatory roadmap for your company, do you need to be licensed in a certain way? And then the second piece is around the compliance and the tactical piece about really managing these risks and doing it, like I said, in a way that's a competitive advantage in helping you build your business. And then the third thing is, unlike other advisory firms, we do public policy work. We do gun relations and lobbying. And so we spent a lot of

time helping educate, somewhat through what I did circle, just helping educate around these different business models like companies that are using alternative sources to make underwriting decisions on the credit side, for example. There's a lot of discussion around that in terms of there are certainly benefits. You're reaching new people who may be previously underbanked or inability to get credit, but there are also unintended consequences of that in terms of discrimination and other things. And that's one example. So educating around that, talking a lot to the regulatory agencies, the folks on Congress

and other global regulators. And in some cases, trying to determine if there's a. policy framework that needs to be changed, legislation or through regulation. So we spent a lot of time with that. And so that's the business model. It's been really exciting to work with. Again, the spectrum of our clients is pretty wide. So we work everything from early stage startups to larger or integrated financial services institutions, technology companies. But really what we're focused on is helping people build things. It's really helping think through these things and build from the ground up and forming long-term partnerships. What would you say the greatest sources of uncertainty are

from a regulatory standpoint for crypto startups today? It depends on the business model and activity. The first thing you need to do in terms of any type of regulatory road mapping is deciding what your business is, what you want to do today, and what you might want to do six, 12 months down the road. And also think ahead in terms of scaling because the runway and the timeline around regulatory licensing is long. And so you have to think ahead in terms of how you want to build this.

Certainly on the exchange side, there's a whole litany of regulatory uncertainty. You've seen a lot of discussion around tokens now, around what are they? Is it a security? Is it a utility? Should the SEC have the purview over this? There's been efforts to exempt tokens from SEC regulation. We have the Token Taxonomy Act that was proposed in Congress. And then those folks that are trying to take advantage and either become broker dealers

or ATS and want to list certain securities, they need to be careful about how they're doing that. Or if you're not in that purview, be careful that you're not. listing securities tokens. So you know, obviously we talked about the fact that the industry has tried to come up with certain types of ratings mechanisms and there's this crypto ratings council around that. So there's a lot of still uncertainty in that space. There's a lot of uncertainty and things like AML, for example. We still have the travel rule. So the travel rule is one. Can you define the travel rule? Yeah. So anytime you make a transaction and the way under the

regulations over $3,000, you basically need to provide certain identifying information with that transaction about the party sending the funds as well as the party receiving the funds. So in the crypto context, there's a little bit of a technical issue. In fact, that the counterparty in that transaction, they don't always have the ability to understand who that person is or where that money is going or those assets are going. And so Finsent and the Treasury Department in the U.S. have said this applies to exchanges. And now we also have the Financial Action Task Force, which is the global body,

which came out with some guidance around digital currency that said, you also need to comply with this type of transaction on an international basis. So this is an area where the industry needs to kind of galvanize and come up and come up with a solution, both on a technical perspective as well as a policy perspective and work as an industry coming up with best practices as well as collaborate with the regulators. And I think that's one area where I think the industry has had issues in the past,

but I think the industry can really help itself by collaborating, by coming up with best practices on a lot of areas which are kind of low-hanging fruit. We talked about market fairness in general and some of these things. There was a report by the New York Attorney General that came out, I think it was last summer, sometime in 2018. They did a sweep of all the major exchanges to determine how are they managing their trading practices. So how are they determining fees? How are they managing dealing with outages?

and how are they dealing with conflicts of interest? And all these things basically, it would be good if the industry has some basic policies and procedures in place to kind of provide some comfort around that because those are real risks. And those are things that from a market fairness perspective need to be addressed. It's funny that you mentioned conflicts of interest. I mean, there's exchanges that Shuller remain unnamed that have investment arms that will invest in tokens, which are subsequently listed on the exchange. This is something we've seen happen a lot. It would be incredible if that actually happened in equity markets with NYC investing in a pre-IPO round of a startup that went public or something. Do you think that crypto exchanges will just be subject to a different set of rules or they'll eventually be forced to sort of actually become truly integrated and subject to the same rules as NASDAQ and IC.

Yeah, I think at some point that you're going to see a similar type of approach that you see in traditional equity markets, traditional stock markets. It just makes sense. I mean, I think the mission of the SEC is to one, protect investors, but also protect the fairness of the markets. And right, they're not trying to determine who makes money and who doesn't, but they're just making sure that it's a level playing field and that the investors have the information. And that also that the folks that are operating the exchanges are doing it in a fair manner and doing things are not self-serving. There's no proprietary trading or insider trading or perceived conflicts of interest. there's no preference around market makers and things like that. And so that there's controls, controls around market surveillance and there's transparency around fees around.

This has been a developing practice. And a lot of this was unregulated. So early days you looked at the way that the markets operated or that the price of Bitcoin was going up and down. Pretty volatile, right? And so obviously there was a lot of arbitrage. There was a lot of questions around manipulation around what does that mean. And so obviously, as the market matures and as there are real money being traded here, there needs to be more kind of regulation to make sure it will eventually, I think,

be akin to what we see in traditional markets. So speaking of the SEC, so the SEC is really a point of frustration for a lot of different constituencies in this industry right now. You have the exchanges and the market infrastructure providers that are looking for clarity on whether or not something is a security, for instance. On the other hand, you have a lot of ICOs that have just kind of run amok and are we going to see more enforcement actions? It's a big question. Some feel that the SEC hasn't done enough there.

And then you have the issue of qualified custody and specifically a good control location and will the SEC start to act on some of these proposals from broker dealers to essentially hold digital assets in a qualified manner. So that's a lot. I mean, they're getting bombarded from all angles and the perception is that they're not doing enough. I'm curious what you think of the current state of affairs as it relates to the issues that the SEC is facing and are we making progress here? Is anything happening? I think we're making progress. I think the SEC has come a long way in terms of their approach, in terms of having the right people in place and having a dedicated kind of office to look at this stuff and a person who's kind of in charge of reviewing it. And all the other regulatory agencies are the same. They all have an office of innovation

and they're doing outreach and they want to learn more. And I think that the big part is that they're are lines of communication and there is a dialogue more than just go in and present to a regulator and you get nothing back. I think those are all good things. I think the challenge is, is you look at guidance and a lot of this is difficult because a lot of the technology is moving so quickly. We talked about where crypto was in 2013 to today and you look at some of these investment vehicles and you look at some of the things, tokens and things that we weren't even talking about in 2013, in ICOs, I think it's difficult. And the other difficult thing is they can come up with as much guidance as they want. But then it's always incumbent upon folks that are managing these businesses.

You have to apply the laws and regulations to your business and your activity. So a lot of its effects and circumstances test, the SEC can't provide guidance for every single type of business. And so that's where the challenge is. Their guidance has to be clear enough and have to have enough general principles to be able to make that, to do that, to go through that process. I think on the ICO front, that's a prime example of a lot of these things. I think governments have attempted, for the most part, to allow some of these innovations to evolve without taking too much of a hands-on approach. But as things like ICOs and real dollars get thrown around, you look at some of these

ICOs and the money, it's staggering, they have to react and make sure that there's no real negative impact, like I said before, on investors. or on the markets. And so I think we are going to see more enforcement actions on ICOs. We've seen some pretty large ones and settlements over the last few weeks. I think we're also going to see at the state level. I think there's still a backlog because there was a lot of this activity. There was uncertainty. There was people taking advantage of the wave here. But I think that's just an example of things that we have both two sides of the house. Most agencies and the SEC is looking at things on a policy side, but also is an enforcement side as well. And the same thing holds true.

like Fence and other agencies as well. So this week we had the EOS enforcement action, which is probably the most high profile SEC case against an ICO that we've ever seen. Some people were shocked that it was such a somewhat relatively speaking small settlement, at least compared to the size of the rays. And so there is a lot of speculation as to why that might be.

Maybe the SEC didn't have the heart to actually engage in a long, drawn-out, lawsuit or maybe it was like a harm reduction thing where they didn't want to totally obliterate the value of this asset that thousands of people hold. What do you make of that? Do you think it was fair? Do you think that is the kind of settlement we'll be seeing from here on out? Yeah. It's funny when you say $24 million is a small amount, but you're actually right. I mean, in terms of percentage of what the raise was, it was a small percentage. But I think there's a number of factors having not been privy to the actual settlement,

but there's a number of factors that go into an SEC settlement like that. They look at the level of cooperation of the firm that they're dealing with, as well as the potential long-term impact, like you mentioned, and the viability of the franchise. And so I think the SEC definitely wants to make a statement here in terms of these are actions that basically won't be tolerated, but also I don't think they necessarily want to be punitive in terms of shutting all these businesses down.

So you're seeing penalties. which you'll see escalating fine amounts and settlement amounts. But again, I think it will be all relative to the business. Most cases, it won't have too much of a detrimental effect, although like KIC, I believe, has determined that they're shutting down their messaging app after getting $100 million suit from the SEC. That was very public and vocal about that around ICOs. But for the most part, I think the SEC is trying to take a reasonable approach.

And I think those in the industry, those have gotten caught up this. They're trying to do the right thing or they're working closely with them. I think they'll be able to kind of weather the storm in terms of any type of enforcement action here. And on the other side of it, the SEC is also issued a no action letter, right? And some no action letters. And I think they're also looking at providing more guidance there as well in terms of we talked about everything's effects and circumstances analysis. And that's exactly what the no action letter processes. Therefore, it's not as fast a process as we would like. But when someone's trying to get some more comfort around actually.

So avoiding enforcement going in on the front door and we had this, I think it was turnkey jet, that issued some tokens there. So that's another positive development. Do you think that we're going to live in this world where there's a regulatory arbitrage with setting up venues outside the United States? I mean, you were involved in the Poloniac's acquisition at Circle. It looks like they've established operations in Bermuda. One would think that's with the idea that it's a more permissive regulatory regime down there. as opposed to operating it out of the United States.

Do you think that this is a playbook that we're going to see from entrepreneurs going forward? Yeah, I think the regulatory arbitraris is always a concern because especially from a U.S. perspective, we want to see and encourage this business in the U.S. I think a lot of the largest exchanges are here, but in terms of volumes, most of the volumes of the exchange activity is outside the U.S. And I don't think anyone wants us. I think there's real opportunities to build big businesses here and good business. You look at Circle and the ability to bring in.

a lot of people into economies and jobs and also create products and services that help consumers. I think that's important. And I think Jeremy testified to this a while back in front of Congress in terms of a little bit around the decision to move to Bermuda and a little bit around what's going on in the U.S. and some of the competitive disadvantage that we're at. And it's also driving not only businesses, but investors to invest in offshore activity and things like that. And so I think one, the U.S. needs to think through the approach and make sure that we're not discouraging and creating that arbitrage. But I also think these are global businesses. And so it's very difficult if you're operating and you have to comply with different laws in different jurisdictions.

It could impact how your product is your user interface or your product or create a lot of friction and create a lot of extra costs that you don't necessarily need in terms of building the business. So I think that's also important as well. It's a real concern. I think there's been some, in certain cases we've seen, like on the AML side, FATF has come up with some rules, which are more of a kind of a global type of guidance, which is good. More things like that would be helpful to have kind of a streamless global approach. Obviously, that's not the easiest thing to do.

But I think a lot of these conversations are being had. And I think things like, you know, we'll probably talk about Libra and things like that, But that has been an impetus around having these discussions because all these things can have a very serious impact and a global impact on, not only from a regulatory perspective, but from an economic perspective. That makes sense. I definitely want to get into Libra. Maybe before we do, you mentioned the venues moving outside the United States and the bulk of the trading volumes on the exchanges right now actually happening outside the United States. So BitFenex and Benance probably being the two largest venues.

And BitFex. And Bitmex, not on the spot market, but certainly on the, the, derivatives with their perpetual swap product, which is pretty much like a spot product, I guess. With that reality, that makes it really challenging for financial institutions that are proposing to do exchange traded products. If you read the Winklevoss denial, it kind of points to qualified custody and regulated spot markets that are properly surveilled and that function like our equity markets, for instance. So we have the venues pushing outside the United States, but we also have financial institutions that want to do ETFs. How do you see this playing out? Or we,

any closer to seeing an ETF or the concerns being addressed? Yeah, I think we're close to seeing an ETF. Everyone's looks at the ETF as maybe being that kind of watershed moment in terms of creating some legitimacy or really helping this market evolve. And to some extent, I think that's true. And to another extent, I think there's probably more to that. But I think it obviously would be a real positive development. I think the ones that we've seen to date, there just hasn't been the level of confidence. I think the SEC, we just haven't had the right kind of facts and circumstances come before the SEC to give them the level of confidence to approve it. But I do think because we're seeing the maturity of these infrastructure or the governance around

some of these things, some of the efforts of the industry to come up with best practice, come up with kind of certain levels of self-regulation and to interact with different regulatory bodies. All those things are factors that will lead to. I would think within the next 12 months, we definitely will have something that's approved, maybe even shorter. I think we're getting close. and fingers crossed there. And do you think it's the market manipulation that's holding it up right now with custody being kind of a solved problem since the initial Winklevoss application? Yeah, I think market manipulation has always been the real concern. I think that's an area where until you can show that you really have controls around that or there's real stability in the markets,

then there's just going to be two more questions and answers. And it's easier for the SEC to say no than to go out in line and then get bitten on the back end. You mentioned self-regulation in the exchange industry. I mean, do you think that it's plausible that we get a real SRO in the U.S. in the next couple of years following kind of the Japanese model? Yeah, I don't think the industry is ready for that. I think we need to kind of walk before we can run, but I do think there's baby steps and something that could lead up to that. I think there's kind of low-hanging fruit in terms of things that the industry can do in terms of coming up with best practices, which are kind of self-regulation light. We talked about there have been some efforts around this, around

crypto ratings council and some things around creating of there's been industry efforts obviously to create associations and collisions and those are all positive things but i think the self-regulatory sRO is a very detailed thing it takes a lot of effort and it takes a lot of governance around it i just don't think one the industry is mature enough for that yet and frankly there's just too much uncertainty a lot of things anyways there's uncertainty not only around the regulations but around the technology. I still don't think we know how this is going to be harnessed. We're still in early days here, although we've seen a lot of changes over the last 10 years or so, but until we really know what the activities are going to be, because when you think about

regulation, it's all activities based and risk-based. And until you know, can really know, get your arms around those two things, you can't take that next step. Do you have a view on whether there should be kind of a disclosure framework for new token issuances? We haven't really seen anything of the sort. Aside from, for instance, the block stack token, which they went through the kind of conventional, fully regulated processes, something like an EOS, you know, they got essentially a safe harbor. I think my objection to that is that there never has been a really sufficient level of disclosure over what the value drivers of the token might be. Do you think that will be something that emerges or will the SEC continue to legitimate some of these prior launches and not insist

on disclosure. Yeah. I mean, disclosure and transparency generally are a good thing and I think are something that you'll see a lot more of. And I think out of necessity

as well as I think at some point there'll be more pressure from the SEC and other regulators to require it. But I also think that from a business standpoint in being kind of proactive and preemptive on this,

I think you're going to see more and more disclosure and transparency. I think those are important, not only just in the token issuance perspective, but in all areas of the business activity. So yeah, I think you will see more disclosure going forward.

I have to say I'm surprised exchanges haven't united around a standard. Some of them act in concert in terms of listing assets at the same time. But there has been very little pressure so far on issuers to actually be transparent about the issuance schedule and the nature of the token and the valley drivers and so on. Maybe we'll see some more of that now. I think we're finally getting to a place where we have the bigger players. is getting in a room and thinking through and starting to come up with some of these things around best practices. I mean, forever we went through this time where I think people were just trying

to build their business. And so you didn't really have the circles and the coin bases of the world and others having time to get in the room and also having the resources to do it. But now you have really smart people. You have strong legal people in all those firms and obviously strong leadership in these firms. And there's a will now. And I think that's half the battle. And now you're starting to see, like I said, this crypto ratings council, is it perfect? Probably not. A lot of these things, it's a step towards, it's a step towards, let's create something. We can always iterate on it, make it better and improve it, but you have to start somewhere. I think also the success of all these things, though, are making sure that all the right stakeholders are involved. And so it's not

just industry, you can't act alone. It has to be interaction with regulators. It has to be interaction with investors. It has to be kind of all hands on deck from that perspective. But like I said, you need a starting point and something to build off of and to get to something. You know, you look at the standard capitals market. That stuff wasn't just built in a day either. And that took a lot of time to get to where we are today in terms of those laws and infrastructure, the SROs and the compliance protocols and all those things are. And so it will take time. But as long as we're working towards that direction as an industry, I think that's the important part. That makes sense. So you mentioned Libra, and I think it's undoubtedly the largest

story of the year in the industry. I mean, this, if it's successful. Nothing going on. Nothing to see here. Yeah. I mean, if successful, we're talking about something that could destabilize fiat currencies globally. This could be a new payment rail that threatens the visas and mastercards and PayPal's of the world. So the potential impacts here are huge. And there's a ton of questions. I think the regulatory pushback to this was swift.

And so I'd be curious, just your perception of where we stand in terms of will it launch? What are the major regulatory barriers that need to be cleared north? for that to happen. Yeah. Well, let's start with the positive. I think the Libra project and the fact that it always takes something for government bodies to act or react. So usually it's a crisis situation. You know, you look at the traditional financial crisis with traditional institutions and response to that. And so we've had a lot of these same questions just in general in terms of cryptocurrency around a lot of the same risk in buckets that I talked about around AML, around stable coins, around what's backing stable coins, what are the issues around what's a security, what's not a security. And I think

the positive here is that this has now gotten people to the table. It's gotten people's antennas up and people are reacting to this. And obviously, people have their own opinions about Facebook. But I think the scale of this opportunity can't be undersold. I think it really, there are a lot of positives here. But on the flip side, yes, there are a lot of risks. And I think it's going to take time. I think I'm sure the Facebook folks and Libra, again, it's not just Facebook, people point in the finger of Facebook, but Libra is an association and hopefully will be a broad association over time. And this will be very decentralized. But it has a lot of potential impact, like I said, in areas, but on the risk side, things that need to be thought through very carefully.

And you've seen in the comments since they announced the initial announcement around wanting to work with regulators and understand and do the education that we've always done around. How do we deal with these risks? What do we need to do from a technical perspective, from a policy perspective? There's been different reactions from different countries. Some countries have been pretty really harsh in terms of just, it's a non-starter and we're going to ban it. Or other countries have been, you look at the hearings that we had here with Congress, and it was pretty harsh rhetoric, but they're still going to be meeting with the folks and they're going to want to understand it.

You know, no one to data said this is a total non-starter, but I think nothing's going to happen until all these questions are answered. Do you think that the composition of the basket can end up being politicized? Does central bankers feel hard done by in terms of being underrepresented in the basket? Yeah, I didn't think it could be politicized. But yeah, I mean, that's a real concern, right? Because currencies, that's when you really pull in geopolitical issues in different countries and different currencies and that cuts multiple ways in terms of what could the impact?

of this beyond, especially those countries that have an unstable currency. But in terms of what's in the basket, it's obviously going to be a concern from a number of different fronts in terms of how that's managed and who's managing. And so what is this association doing? Who's in charge of it? And I think those are some of the other issues that are really being addressed now in terms of this governance around it. You'll see, I would think, in the next few months, you'll see more and more. The folks that have started talking about this have vowed to be pretty transparent. And so we'll see. We'll see what happens in terms of getting more of an understanding of how this is going to be built. Because like anything else, I think these things take time to build out. I don't think that they came out

with this and said this is a fully big solution by any means. And so a lot of this is a work in progress, including the backing of the coins. To the extent that the dollar is actually a big part of that basket, you would think that the U.S. would actually be well positioned here to not only build the strength of the dollar globally, but also potentially enforce sanctions in ways that maybe they had not been able to before by virtue of the association being largely comprised of U.S. companies. Do you think that that's part of the dialogue here where the U.S. could actually see this as a net positive in terms of geopolitical order?

Yeah, I haven't really thought about that. But I think, yeah, maybe that's interesting in terms of what is a level, not just from the U.S., but from the other countries or the other kind of who has more authority or who has the ability to take advantage of the structure here. I think obviously the U.S. will have a lot to say. To some extent, this is again going to be a global conversation. So this is like a G20. It's like something that is kind of beyond just one country or one currency if this is ever going to get to market and become a reality because it's just the size and the scale and the potential impact of it. So maybe a closing question here. You've been in the industry for a long time. What are you most excited about right now in the industry? I'm just excited about the level of entrepreneurialism that continues. Like I said earlier, we haven't even scratched the surface.

We haven't got to that really good use case yet. And the ability of things that could potentially have real impact from a consumer perspective as well as just a general economic perspective. And the way this has continued to evolve, like I said, things around tokens and the fact that we had Ethereum and then smart contracts and tokens and the ability to how can we really use that and harness that. I think it should be really interesting to see what happens next. And I see it day to day with clients in terms of what they're trying to build and how they're integrating into this business. And it could integrate. You see this in all kinds of crazy

things, everything from like gaming and video gaming to different types of businesses and beyond just traditional financial services. And so I think just that wealth of opportunity. And the other thing that excites me again is that just smart people are trying to get in here and as well as investors. And so we're still seeing a lot of investment, a lot of startups, a lot of ingenuity. You have things from, especially from the ground up, you have a lot of the, we're here in Boston, Cambridge, where there's a lot of universities, MIT and Harvard and others. And they're all looking at this closely and you have really smart people, which leads me to believe you have the combination of money, smart people, entrepreneurialism.

I think all those things are going to lead to a lot of success down the road. What the timing is, I wish I had the crystal ball, two years away, probably not. but five, 10, 15 years, I think we're going to see something pretty compelling. We'll see. We'll see. It still remains. There is uncertainty, but there's a lot of excitement as well. Couldn't agree more about the talent. It's if you look back at 2013 versus now, it's night and day in terms of the amount of quality people that are entering this field and building. So where can people learn more about FS Factor? Yeah. Just go to our website, FSVector.com, and feel free to reach out to me, my email and contact information's on there. And we're out. We're doing a lot of things. We're doing some training programs around

fintech and blockchain. We're based in Washington, D.C. We have an office there, and they're always happy to talk to people and learn more about what people are doing and be a resource if needed as well. Well, you've been a great resource to the entrepreneurs in our portfolio, and we appreciate it. So thanks for joining the podcast. Thanks so much for having me. Appreciate it. This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visitcastleisland.vc. And a big thank you to all of our listeners, Except those of you who believe in the underlying blockchain technology, but not cryptocurrency. You know who you are.